SALT Sticking Points Shouldn't Keep GOP From Passing the Budget

WASHINGTON, DC - FEBRUARY 28: U.S. President Donald Trump talks with Rep. Peter King (R-NY) after addressing a joint session of the U.S. Congress on February 28, 2017 in the House chamber of the U.S. Capitol in Washington, DC. Trump's first address to Congress focused on national security, tax and regulatory reform, the economy, and healthcare. (Photo by Chip Somodevilla/Getty Images)

The piece is a joint contribution from National Taxpayers Union Senior Fellow Mattie Duppler and Forbes Contributor Ryan Ellis

The House is expected to pass the Senate budget plan this week, marking a significant step forward in the efforts to pass comprehensive tax reform. While Republicans agree that overhauling the nation’s complex and unfair tax code is a priority, concerns remain from some Members of Congress about how tax reform will treat the State and Local Tax (SALT) Deduction. There are many reasons Republicans should still feel comfortable supporting the budget resolution this week even as those details continue to be negotiated.

Full elimination of SALT, as the framework details, would of course be a big change for states with exceptionally high state and local tax burdens. There is a strong case to be made that taxpayers in these states will be better off in the long term with elimination of the deduction, because it obscures the true impact of bad state and local policy. Without the federal deduction, state and local policymakers will be under much higher pressure to relieve their constituents of high tax and spending burdens. But the unified framework also provides several immediate benefits to taxpayers that complement the elimination of SALT.

First, the framework eliminates the Alternative Minimum Tax (AMT), an archaic tax that effectively forces higher-income earners to calculate their tax burden twice, and pay the highest of the two amounts. The AMT increases an earners’ tax bill by restricting the deductions taxpayers can take – including SALT. As such, many people who believe they benefit from SALT are actually prevented from using the deduction because of the AMT. For instance: a quick glance at IRS data shows that of the 361,000 people in Nassau County in New York who would claim SALT, 21 percent are prevented from doing so because of the AMT.

What’s more, SALT is overwhelmingly taken by wealthy earners – the Tax Foundation estimates that 88 percent of those using SALT make over $100,000. Under current law, those making over $418,000 pay the top income tax rate of 39.6 percent. The framework originally called for lowering this rate to 35 percent, but recent reports suggest a top rate of 39.6 percent will remain for some earners. However, that the top rate won’t kick in until income exceeds $1 million. If this is a case, higher income earners who take the SALT deduction and make between $418,000 and $999,999 will likely still see tax relief through a lower income tax rate and elimination of the AMT.

That is not to say that the plan leaves earners making over $1 million without any relief. Full elimination of the death tax, as the framework demands, would relieve family businesses of the huge financial burdens the death tax imposes. In 2016 alone, it is estimated that family business owners spent an average of $74,940 on insurance for the death tax and $170,800 on other planning costs.

Decisions on the SALT deduction are not all or nothing. Lawmakers will privately concede they are far more concerned about the politics surrounding the property tax component of SALT than the state income tax component. The sales tax deduction is only one-third of the tax benefit, according to JCT.

Even within the property tax deduction subset of SALT, further limitations are possible. The benefit can be means tested so that it doesn’t benefit the rich. It can be limited to primary residences. It can be capped in dollar terms. It can be fixed in size and scope, letting inflation erode it generationally.

These minor concessions on SALT would allow policy makers to unify Republicans behind tax reform while still repealing 80-90 percent of the SALT benefit.

All of this will be accomplished under a tax plan that the framework dictates will still be “at least as progressive” as the current code. And unlike the House’s budget document, the Senate budget plan gives policymakers $1.5 trillion worth of additional revenue to confront these difficult choices. There are many steps to go on the road to tax reform, but the crucial step of passing the Senate budget through the House should be one all Republicans feel comfortable taking together.

I am one of the leading tax experts in the political world today. I am the Senior Tax Advisor at the Family Business Coalition. I worked for over a decade at Grover Norquist’s “Americans for Tax Reform” as their lead federal tax policy director. I am also an “Enrolled Agent,...